Many people aim to start investing at the beginning of the new year. Getting started is key, whether it's $10 a month or $1,000. However, with so many investment options available, getting lost in a sea of choices is easy.
So, if you're starting off (or even an experienced investor), an important part of every portfolio is an index fund. This provides exposure to the whole market, giving you instant diversification. Among the various index funds available, the S&P 500 is probably the most balanced, and the best way to invest in it is via the Vanguard S&P 500 (VOO +1.23%) ETF.
So why does this one stand out versus the others? Read on to find out.
The S&P 500 is the best starter index
First, let's analyze the index versus others. The Nasdaq-100 and Dow Jones Industrial Average are other noteworthy indexes that new investors may be familiar with. The S&P 500 is made up of the 500 or so largest stocks listed on the U.S. stock exchanges (the actual number can be slightly above or below 500). So, whether it's a real estate trust, healthcare, or oil company, it could be included in the S&P 500.
NYSEMKT: VOO
Key Data Points
The Nasdaq-100 only includes companies listed on the Nasdaq stock exchange and omits financial stocks. With many of the largest tech companies listed on the Nasdaq, it's easy to see why the index is normally accompanied by the phrase "tech-heavy." While being tech-heavy has been a winning strategy over the past decade, that's not always the case. So, while I like the Nasdaq index (you can invest in it by purchasing shares of the Invesco QQQ (QQQ +1.31%)), I don't think it's the best choice for people just starting (although it makes a great second purchase).
The Dow Jones is mostly a legacy index, as it's an invite-only index with odd weighting rules. Investing in the Dow isn't a great idea, as the S&P 500 or the Nasdaq provide much more reasonable options.
So, what makes the Vanguard S&P 500 stand out from the rest?
The Vanguard S&P 500 ETF is a top option
There are plenty of options in the S&P 500 index fund space. However, the Vanguard option is the most popular due to its incredibly low expense ratio: 0.03%. The expense ratio is how much the fund charges you to operate it each year. So, with the VOO's expense ratio of 0.03%, you only have to pay three cents for every $100 invested annually -- practically unnoticeable.
Because the Vanguard S&P 500 ETF mirrors the S&P 500, its makeup is similar, with the top 10 holdings looking like this:
| Company | Weighting |
|---|---|
| Microsoft | 7.31% |
| Apple | 7.24% |
| Amazon | 3.44% |
| Nvidia | 3% |
| Alphabet (Class A Shares) | 2.04% |
| Meta Platforms | 1.89% |
| Alphabet (Class C Shares) | 1.75% |
| Tesla | 1.72% |
| Berkshire Hathaway (Class B Shares) | 1.7% |
| UnitedHealth Group | 1.33% |
Data source: Vanguard. Weighting is as of Jan. 10.
An investment in the Vanguard SP&P 500 ETF has proven highly profitable, with $10,000 invested a decade ago turning into more than $31,000. That's a strong performance that would only be amplified if investors consistently contribute monthly.
While index fund investing may be boring, it's a proven way to make money over the long term. It also provides instant diversification to the entire stock market, freeing investors to research a corner of the market they're interested in (like tech or healthcare).
Index funds may not have as explosive returns as individual stocks, but they don't have nearly the downside. As a result, it is one of the best investment options for beginners. But if you're also looking to buy some individual stocks, a few companies look like great buys now.
